Note 9. Stock Award Plans and Stock-Based Compensation

Stock Award Plans

The Company grants stock options and restricted stock awards to employees and others. All outstanding stock options of the Company as of March 31, 2014 were granted with an exercise price equal to the fair market value on the date of grant. Outstanding stock options, if not exercised, expire 10 years from the date of grant.

The Company’s 2008 Stock Incentive Plan (the “Plan”) authorizes the grant of a variety of equity awards to the Company’s officers, directors, employees, consultants and advisers, including awards of unrestricted and restricted stock, restricted stock units, incentive and nonqualified stock options to purchase shares of common stock, performance share awards and stock appreciation rights. The Plan provides that options may only be granted at the current market value on the date of grant. Each share of stock issued pursuant to a stock option or stock appreciation right counts as one share against the maximum number of shares issuable under the Plan, while each share of stock issued pursuant to any other type of award counts as 1.58 shares against the maximum number of shares issuable under the Plan for grants made on or after August 11, 2010 (and as 1.5 shares for grants made prior to that date). The Company’s policy for issuing shares upon exercise of stock options or the vesting of its restricted stock awards and restricted stock units is to issue shares of common stock at the time of exercise or conversion. At March 31, 2014, a total of approximately 1,317,000 shares were available for future issuance under the Plan.

Stock-Based Compensation

The following table summarizes stock-based compensation expense by financial statement line item in the Company’s consolidated statements of operations for the fiscal years ended March 31, 2014, 2013 and 2012 (in thousands):


	March 31,
	2014		2013		2012
	(in $000’s)
Cost of product revenue	$	614	$	450	$	282
Research and development		2,347		1,843		1,719
Selling, general and administrative		8,257		7,208		5,772

	$	11,218	$	9,501	$	7,773

The components of stock-based compensation for the fiscal years ended March 31, 2014, 2013 and 2012 were as follows (in thousands):


	March 31,
	2014		2013		2012
	(in $000’s)
Restricted stock units	$	8,008	$	5,970	$	2,808
Stock options		2,679		2,680		2,722
Restricted stock		314		653		2,095
Employee stock purchase plan		217		198		148

	$	11,218	$	9,501	$	7,773

Stock Options

The following table summarized stock option activity for the year ended March 31, 2014:


	Options (in thousands)			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (in thousands)
Outstanding at beginning of year		4,228		$	11.49		5.37
Granted		336			23.56
Exercised		(1,029	)		9.10
Cancelled and expired		(43	)		18.54

Outstanding at end of year		3,492		$	13.27		4.92	$	44,634

Exercisable at end of year		2,708		$	11.40		3.98	$	39,653

Options vested and expected to vest at end of year		3,401		$	13.17		4.85	$	43,819

The remaining unrecognized stock-based compensation expense for unvested stock option awards at March 31, 2014 was approximately $4.4 million, net of forfeitures, and the weighted-average period over which this cost will be recognized is 2.7 years.

The aggregate intrinsic value of options exercised for fiscal years 2014, 2013 and 2012 was $16.3 million, $4.6 million and $13.4 million, respectively. The total cash received as a result of employee stock option exercises during the years ended March 31, 2014, 2013 and 2012 was approximately $9.4 million, $2.9 million and $14.3 million, respectively. The total fair value of options vested in fiscal years 2014, 2013 and 2012 was $2.5 million, $2.6 million and $3.8 million, respectively.

The weighted average grant-date fair value for options granted during the years ended March 31, 2014, 2013 and 2012 was $9.85, $9.66 and $8.35 per share, respectively.

The Company estimates the fair value of each stock option granted at the grant date using the Black-Scholes option valuation model. The fair value of options granted during the years ended March 31, 2014, 2013 and 2012 were calculated using the following weighted average assumptions:


	2014			2013			2012
Risk-free interest rate		0.94	%		0.78	%		1.47	%
Expected option life (years)		4.25			4.31			5.19
Expected volatility		51.7	%		56.2	%		53.1	%

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a term consistent with the expected life of the stock options. Volatility assumptions are calculated based on the historical volatility of the Company’s stock and adjustments for factors not reflected in historical volatility that may be more indicative of future volatility. The Company estimates the expected term of options based on historical exercise experience and estimates of future exercises of unexercised options. An expected dividend yield of zero is used in the option valuation model because the Company does not pay cash dividends and does not expect to pay any cash dividends in the foreseeable future. The Company estimates forfeitures based on an analysis of actual historical forfeitures, adjusted to the extent historic forfeitures may not be indicative of forfeitures in the future.

Restricted Stock and Restricted Stock Units

The following table summarizes restricted stock and restricted stock unit activity for the fiscal year ended March 31, 2014:


	Number of Shares (in thousands)			Weighted Average Grant Date Fair Value (per share)
Restricted stock and restricted stock units at beginning of year		1,022		$	18.44
Granted		570			23.34
Vested		(364	)		16.58
Forfeited		(54	)		18.93

Restricted stock and restricted stock units at end of year		1,174		$	21.37

The remaining unrecognized compensation expense for outstanding restricted stock and restricted stock units, including performance-based awards, as of March 31, 2014 was $10.4 million and the weighted-average period over which this cost will be recognized is 1.8 years.

The weighted average grant-date fair value for restricted stock and restricted stock units granted during the years ended March 31, 2014, 2013 and 2012 was $23.34, $21.82 and $18.13 per share, respectively. The total fair value of restricted stock and restricted stock units vested in fiscal years 2014, 2013 and 2012 was $6.0 million, $3.0 million and $1.5 million, respectively.

Performance-Based Awards

Included in the restricted stock and restricted stock units activity discussed above are certain awards granted in fiscal years 2014, 2013 and 2012 that vest subject to certain performance-based criteria.

In May 2013, performance-based awards of restricted stock units for the potential issuance of 268,988 shares of common stock were issued to certain executive officers and employees, all of which vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of March 31, 2014, the Company has met the prescribed performance milestones for a portion of these awards. These awards are still subject to service requirements for vesting for these employees and the compensation expense is being recognized accordingly.

In May 2012, performance-based awards of restricted stock units for the potential issuance of 195,188 shares of common stock were issued to certain executive officers and employees of the Company, all of which will vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of March 31, 2014, the Company has met the prescribed performance milestones for these awards. These awards are still subject to service requirements for vesting for these employees and the compensation expense is being recognized accordingly.

In May 2011 and June 2011, performance-based awards of restricted stock units for the potential issuance of 284,000 shares of common stock were issued to certain executive officers and members of the senior management of the Company, all of which will vest upon achievement of prescribed service milestones by the award recipients and performance milestones by the Company. As of March 31, 2014, the Company has met the prescribed milestones for 234,000 shares underlying these awards. During the three months ended December 31, 2013, the Company determined that it was no longer probable that the underlying performance milestones on the remaining 50,000 restricted stock units and therefore reversed $0.8 million that had been previously recorded as stock-based compensation expense. In March 2014, the Company modified the performance condition on these 50,000 restricted stock units and as of March 31, 2014, the Company believes that it is probable that the prescribed performance milestones will be met and the compensation expense is being recognized accordingly.

During the year ended March 31, 2014, the Company has recorded $3.9 million in stock-based compensation expense for equity awards in which the prescribed performance milestones have been achieved or are probable of being achieved. The remaining unrecognized compensation expense related to these equity awards at March 31, 2014 is $4.5 million based on the Company’s current assessment of probability of achieving the performance milestones. The weighted-average period over which this cost will be recognized is 1.7 years.

Employee Stock Purchase Plan

The Company has an employee stock purchase plan, or ESPP. Under the ESPP, eligible employees, including officers and directors, who have completed at least three months of employment with the Company or its subsidiaries who elect to participate in the purchase plan instruct the Company to withhold a specified amount of the employee’s income each payroll period during a six-month payment period (the periods April 1—September 30 and October 1—March 31). On the last business day of each six-month payment period, the amount withheld is used to purchase shares of the Company’s common stock at an exercise price equal to 85% of the lower of its market price on the first business day or the last business day of the payment period. The Company recognized compensation expense of $0.2 million, $0.2 million and $0.1 million for the fiscal years ended March 31, 2014, 2013 and 2012, respectively, related to the ESPP.